ADI ready for the big leagues

Poised to move beyond its traditional role as a small but significant player in the semiconductor industry, Analog Devices Inc. has prepped itself for the high-stakes growth markets it has coveted but often found beyond its grasp.

It's been a long and often arduous journey, but the company has emerged with a product line that's tailored to meet the demands of emerging markets.

"I think one of the very clear things that is going on now is that the world is changing from being very data-processing-centric to really being signal-processing- centric," said Jerald Fishman, president and chief executive of the company, which is based here.

"Signal processing is reaching maturity, and that is actually quite fortunate for us because that is what we've been doing all along," he said. "Our technology base and the way the market is headed are lining up pretty well."

After increasing revenue by less than $50 million during the semiconductor industry's downturn between 1996 and 1998, Analog Devices improved its top line by more than $200 million in its 1999 fiscal year, to a total of $1.45 billion. And Fishman believes the company is on target to hit the $2 billion mark in fiscal 2000.

For Analog Devices, the new century could bring the payoff for a decade of investment that to some observers has had the company a little too far ahead of the curve.

"Analog Devices' strategy has been very different from other analog companies," said Drew Peck, an analyst with SG Cowen Securities Corp. in Boston. "They've been uniquely willing to make the very long-term investments ... and it appears they're finally in a position to start to reap what they've sown for so long."

Through the difficult years of the recent down cycle, Analog Devices kept earnings on the positive side, even as it honored a commitment to maintain an R&D budget of around 17% of total revenue.

"The world has been a pretty harsh place in the last two years or so, but we kept our foot on the R&D accelerator," Fishman said. "We've kept investing in new products. We shifted a lot of our R&D toward the communications market, and as a result we have an enormously strong portfolio aimed at high-volume applications."

Analog Devices was one of the earliest companies to make a strategic commitment to digital signal processing. Although its DSP efforts began in 1985, it was only recently that the business began to operate profitably, according to Peck, who said Analog Devices' DSP and analog portfolios also appear to be aligning.

"DSPs for so long were a solution looking for a problem to solve," he said. "All of a sudden those problems are emerging right and left. They've seen the potential for so many years, and it's really starting to explode. I strongly believe the end markets that are being addressed by ADI are just on the verge of a very long and dramatic surge."

An analog foundation

Founded in 1965, Analog Devices' traditional area of strength, not surprisingly, has been its extensive portfolio of analog products.

In the past decade, the company has differentiated its analog product line to meet high-performance demands-particularly in the areas of converters and amplifiers-a strategy that has it positioned to take advantage of the emerging communications revolution under way in the electronics industry.

"Our competitive landscape has changed," said Mark Skillings, director of marketing at Analog Devices' Standard Linear Products Division. "Ten years ago our competition was companies like Burr- Brown and Maxim. Now it's big-time competition with guys like TI, National, and STMicroelectronics. We're not interested in the low-end commodity analog market. Our expertise is in getting the highest performance at a reasonable cost."

Analog Devices has also seen its key-customer lineup evolve during that period, from primarily military-intensive accounts like Raytheon and Martin Marietta, to communications-oriented OEMs like Ericsson, Motorola, and Nortel.

In data converters, Analog Devices was the leading supplier in 1998 with a 34% market share, more than three times that of its nearest competitor, Texas Instruments Inc., according to research firm Dataquest Inc., San Jose.

Analog Devices has trained its R&D investment and new-product initiatives on high-speed converters with sample rates of greater than 1 MHz, garnering better margins by focusing on high-performance digital consumer and communication end equipment.

Analog Devices finished 1998 with a 14% share of the amplifier market, second to National Semiconductor Corp., which had 15%, according to Dataquest. In the area of high-performance amplifiers with speeds of greater than 50 MHz, however, Analog Devices led the market in 1998 with a 36% share, compared with 20% for National, according to research firm Selantek Inc., Mountain View, Calif.

"When people look at the overall analog market, they tend to view it as homogenous, but it's really fragmented with a high-performance and low-performance part," Fishman said. "We're clearly the No. 1 supplier in the high-performance segment. Our average selling price is probably five times the ASP in the rest of the industry, because we tend to aim our products at higher-performance applications."

While much of the world seems fixated on microprocessors and raw-performance specifications, the importance of analog components hasn't escaped the attention of investors.

"Wall Street gets excited about predictability of earnings and steady improvement," said Vadim Zlotnikov, an analyst with Sanford C. Bernstein & Co. Inc., New York. "Analog Devices has demonstrated the ability to sustain very high share in some of the fastest-growing areas of the market. I think there is much more emphasis being placed on the entire communications-IC area. People are becoming much more aware of standard linear components, converters, power management, and the specialty stuff like physical-layer ICs and MACs [media access controllers]."

Indeed, Cowen's Peck believes the analog market will actually outperform the semiconductor industry as a whole in the next four years.

Although revenue within the analog arena increased at less than 10% annually for the past 15 years, new applications are expected to boost growth to 22% annually for the next four years, while the overall semiconductor market is slated for average growth of about 16%.

"The analog business has always exhibited greater stability, high levels of profitability, high barriers to entry, and lower capital intensity than memory and logic," Peck said. "The down side was that the growth rate was less than the semiconductor industry as a whole. But now, not only do you have all those historic positive attributes, you also have higher-than-average growth rates."

The propellant for the analog market has been the digital revolution. Particularly in emerging communication and consumer applications, analog is increasing its role as the key component in completing the handoff between the conventional analog world and the digital interface.

The analog content in a DVD player, for example, is considerably higher than that found in a VCR. High-definition television requires extremely high-performance converters not found in traditional television sets. And digital-cellular telephones, ironically, contain more analog components than their analog-only predecessors.

"The driving force for semiconductor demand globally for the past 20 years has been the PC," Peck said. "The PC has an unusually low analog content compared to other electronics products. All these other products are starting to emerge with much higher analog content. ... Outside of possibly Texas Instruments, I know of no semiconductor company in the world other than Analog Devices that has the combination of both analog and DSP technology."

Refocusing DSP

If analog technology launched Analog Devices, the energy and resources it's expended on DSP development in the past several years may stamp its future successes.

Analog Devices has seen its DSP fortunes bounce around during the past five years, as the company fluctuated between the third and fourth ranking in a four-player market, according to Forward Concepts Co., Tempe, Ariz. In 1998, the bottom fell out of Analog Devices' DSP sales channel, and its share of the general-purpose DSP market dropped from 12% to 9%.

"They got hurt badly by the Asian flu last year," said Will Strauss, an analyst at Forward Concepts. "A lot of their sockets were in GSM cellular phones in Korea. They've been able to quickly reverse their situation this year, however."

For its 1999 fiscal year, which ended Oct. 10, Analog Devices reported an 83% growth rate in DSP-related revenue, and Strauss believes the company will gain several overall market-share points.

"There has been a renewed vigor in DSP by Analog Devices for some very selfish reasons," he said. "There is a huge drag with DSP. For every dollar they sell in DSP, they sell at least $2.50 worth of mixed-signal and analog chips."

Analog Devices has spent the past year significantly bolstering its DSP portfolio, while laying the groundwork for even greater changes beginning late next year.

"We've moved from playing on the fringe, doing some specific things very well, right to the heart of the DSP market," said Bob Conrad, vice president of the company's DSP group. "We always had been really strong in floating point, but we really needed to light a fire under our 16-bit roadmap. We had stepped back from the mips race."

In regard to 16-bit, general-purpose programmable DSPs, Analog Devices made two major moves in the past year to bolster its effort. The company introduced the ADSP-219x family, which increased its 16-bit portfolio to 300-mips performance, and in February it announced an alliance with Intel Corp. to jointly develop a next-generation 16-bit DSP core.

The Analog Devices/Intel effort, which is being implemented at a joint design center in Austin, Texas, bears some resemblance to the StarCore alliance launched in June 1998 in Atlanta by Lucent Technologies Inc.'s Microelectronics Group and the Semiconductor Products Sector of Motorola Inc. Both ventures were devised in part to combat TI's overwhelming lead in the general-purpose DSP market.

The first products from the Analog Devices/Intel effort are expected to be disclosed by mid-2000. The core is meant to provide high performance at low power for portable and other power-sensitive applications.

Analog Devices bolstered its floating- point DSP portfolio in November with the ADSP-21160, a device within its dual-core Hammerhead line aimed specifically at multiprocessing applications. The company also laid the groundwork for its TigerSharc family, which began sampling this month, with production expected in the second half of 2000.

With two computational units that can support floating-point and 8-, 16-, and 32-bit instructions on the same chip, the device has the highest announced performance expectations of any DSP, at 2 billion multiply/accumulate operations per second. With the ability to do both fixed and floating-point instructions, the TigerSharc is also expected to bridge the gap between Analog Devices' mass-market 16-bit families and applications requiring the highest performance.

"From a revenue standpoint in 2000, we'll get a real lift from the '219x and Hammerhead as logical extensions to existing architectures," Conrad said. "Going forward, we've clearly decided to shoot for a new horizon on both 16- and 32-bit by bringing into the market new instruction-set architectures."

Success stories

Analog Devices' financial rebound can be directly attributed to the popularity of some significant product offerings.

A chipset for ADSL-modem applications has become the most successful merchant offering in the emerging xDSL market. In November, Analog Devices announced the sale of its millionth ADSL chipset, the AD20smp9xx, which integrates DSP with an analog front end.

"They've really taken the lead in DSL," Strauss said. "In addition to the 1 million chipsets shipped, they have about 18 different design-ins with virtually all the non-captive modem suppliers."

In wireless communications markets, Analog Devices has bolstered its position through the emergence of its radio-frequency business.

In September, the company formed the RF Product business unit under the direction of vice president Christian Kermarrec, who reports to Russ Johnsen, vice president and general manager of the Communications Products Division.

"What is going on in the wireline and wireless communications industry as it drives toward digital communications is playing right toward our strengths," Johnsen said. "Our DSP technology, our precision and high-speed converter technology, our analog-signal processing, and RF-signal processing technology is right in the sweet spot."

Typical of these new products is the low-power Othello chipset, introduced in September, which uses RF technology to convert incoming signals directly to baseband for GSM cellular phones.

"By taking an RF-system approach to radio integration, rather than a semiconductor-manufacturing approach, Analog Devices' Othello trumps many of its RF competitors in the race toward single-chip radio," said Allen Leibovitch, an analyst with International Data Corp., Framingham, Mass.

Communications applications contributed to 45% of Analog Devices' fiscal 1999 revenue-up from just 25% the year before-and Fishman believes the market could account for half of total revenue in the coming year.

"Communications is a big business," he said. "We've tended to focus most of our attention on the signal-processing part of that, which is basically high-performance converters and DSP. When you make a list of who can integrate those two things, it's a very short list."

Perhaps the company whose product portfolio most closely matches Analog Devices' is TI, which has spent much of the last four years repositioning itself almost exclusively as a DSP and analog company.

"ADI is where TI wants to be," Peck said. "TI would like to become a larger version of Analog Devices. Certainly TI wants to go in that direction, but there's still a ways to go before TI can truly be said to have a model that is the same as Analog Devices'. Both companies are focused on basically the same markets, and there is plenty of room for both of them."

While Analog Devices continues to chase TI in terms of DSP revenue, and TI has bought its way into a position as overall analog-component sales leader, Fishman said his company maintains advantages in key strategic areas.

"We've been in this business for a long time, and TI's refocusing is probably a good decision for them," he said.

"We're growing at a much faster rate than TI is growing, and producing better profits. From the standpoint of being in the right places with the right technology, I don't think we're light to anyone in this industry."